Affordability goes hand in hand with income.
THE older wisdom believes that a market cycle typically lasts about 10 years. While this is not set in stone and social media has somewhat disrupted this timeframe, one sector that seems to have moved in tandem with this timeline is the property sector.
The Malaysian property market has been on a downtrend for close to a decade. Take the KL Property Index (KLPRP). It has not revisited its peak in 2024. From a high of 1,524 on Aug 18, 2014, it fell to a low of 495 on March 23, 2020, during the Covid-19 lockdowns.
However, this past year, the KLPRP has performed extraordinarily, rebounding to 1,132 as at July 31, 2024, delivering a yearto-date return of 31%.
Is this the sign that our property market is truly on the path to recovery? It the worst over for the sector which has been in the doldrums for over a decade?
The peak of the property market was marked with the rollout of the popular “Developer Interest Bearing Scheme”.
This scheme essentially allows purchasers of property to pay only the initial deposit, with the developer absorbing the interest throughout the construction period until vacant possession.
This eased the entry for many first-time homebuyers who were previously deterred by deposit and interest repayment obligations.
However, as the market overheated, the government abolished the scheme. Nonetheless, various modified schemes continue to exist in the market.
We started witnessing many businesses diversified into property development.
Firefighting equipment manufacturers, confectionery makers and even textile companies entered the sector and became property developers overnight.
This led to a surge in the supply of properties. We must remember, in the past, properties were built sideways.
With advancements in technology and new regulations such as higher plot ratios, properties started being built upwards, unlocking a significant number of units and pushing up land costs.
There was also the mushrooming of “property gurus” who conducted seminars on property investment, which spurred speculations further.
The worst were those that propagate “compressed loans”, where buyers exploited a loophole in the banking system by submitting multiple loan applications at the same time to various banks for several properties.
This allowed them to borrow loans for several properties as the system then was not able to catch these simultaneous submissions.
All was well and good when the market was hot, as buyers could do a quick flip.
But when the market turned, many of these buyers could neither find buyers nor rent out the properties. Without the financial ability to service multiple loans at the same time, their properties were auctioned by the banks.
This led to a huge number of property units being put on the auction market. The situation was further exacerbated when the pandemic hit, causing many people to lose their income.
At one point, there were more than 200 listed companies on Bursa Malaysia involved in property development. As the supply of unsold units far outpaced demand, there was a compression in margins and write downs for many listed developers.
Sales were affected and many projects which were launched could barely achieve 50% of the sales threshold.
The situation was further complicated by delayed project completions, leading to liquidated ascertained damages (LAD) claims piling up.
The verdict of Ang Ming Lee & Ors v Menteri Kesejahteraan Bandar [2020] 1 MLJ 281 led to many homebuyers filing suits against property developers, with the estimated claims reaching Rm48mil due to the extension of time (EOT) granted between 2016 and 2020.
The property market was indeed plagued with many challenges to a point where a veteran industry leader publicly commented that “the golden age of property sector is gone”.
As with all cycles, there is always a turning point. It seemed from the start of 2024, green shoots appeared for the property sector.
Firstly, the catalyst came when the government unveiled the potential of setting up a special economic zone for Singapore and Johor.
Secondly, the inflow of data centre investments drove up land transactions, with many property developers which had landbanks in Johor starting to cash out at significant premiums to their entry prices.
The average transaction price of agriculture land suited for the data centres was in the range of RM60 per sq ft.
Most of these land were less than RM30 per sq ft a year ago. This led to investors paying attention to the market down south.
Furthermore, banks’ appetite for end-financing picked up in the past two years, with an increase in both loan application submissions and approvals.
The latest Federal Court decision in Obata-ambak Holdings Sdn Bhd v Prema Bonanza Sdn Bhd and two other appeals, which discussed the Ang Ming Lee case, stated the ruling on the EOT shall only apply prospectively and not retrospectively.
This was the cherry on the icing, allowing many developers faced by mounting LAD claims to breathe a sigh of relief. It is quite clear that 2024 is an important year for property developers, with the sector seemingly to be firing on all cylinders.
Yet, the Khazanah Research Institute director in a webinar last week, highlighted that our housing market is consistently unaffordable and was against offering “affordable financing” with long tenures.
She proposed for the migration from the current sell-then-build model to the buildand-sell model like other developed countries.
In my view, this policy idea is regressive in nature and not suitable to the current economic structure of Malaysia.
It is too shallow as the crux of the problem of property ownership in our country is due to low wage growth rather than high property price.
Affordability goes hand in hand with income. If the people’s incomes do not increase, affordability will always be a problem, regardless of whether there is affordable financing or otherwise.
Similarly, the migration to build-and-sell will not help the property market pricing in any way apart from reducing abandoned housing or “Project Sakit”.
The repercussion of a migration in model is far-reaching.
While I do agree that this would weed out many incompetent property developers and offer better protection to homebuyers, the downside would be the impact on the supply of property to the market and risk of financially strong property developers cornering the market, leading to oligopolistic or cartel behaviour.
This would eventually drive asset prices up further due to supply scarcity.
At the end of the day, I believe the rationale for property ownership differs from one person to another.
Some believe that real estate is among the safest and most reliable asset classes for investment purposes and hedging against inflation.
Others believe that real estate has limited upside, hence renting is more practical without the long-term loan commitments affecting their lifestyle preferences. This is especially prevalent among the youth today.
My personal view is that the property sector, like any other sector, has its own cycles, and depending on which point one enters the market, there will be different outcomes.
This will shape individual perspective when it comes to property ownership.
Whether the sector remains positive in the long term depends heavily on two key factors – population growth and a burgeoning middle-income society.
By Ng zhu hann Ng zhu hann is the chief executive officer of tradeview Capital. he is also a lawyer and the author of Once upon a time in Bursa. the views expressed here are the writer’s own.
https://www.thestar.com.my/business/insight/2024/08/03/property-market-and-affordability
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